Gov’t buys back GPL for US$1
Seeking local investors
By Gitanjali Singh
Stabroek News
April 1, 2003
AC Power has agreed to sell its shares in Guyana Power and Light (GPL) to the government for US$1 and to relinquish any claims to accrued dividends and other rights related to its share ownership in return for being freed of its outstanding equity obligation of US$3.45M.
The government would manage GPL from the end of this month until it can reach a new deal, preferably with local investors for the power company. The government anticipates in the process that it will be able to implement the higher rates, which it dubbed “unjustified” on January 30 and had added that consumers were being “punished for management’s incompetence”.
The managers are expected to leave at the end of this month as a result of the agreement the government reached on Friday with CDC Globeleq, which also allows AC Power to walk away and the government to retain control of the power company at no cost.
Prime Minister Samuel Hinds and the government directors on GPL’s board, Ronald Alli and Winston Brassington, yesterday announced the details of the preliminary agreements reached with CDC Globeleq to allow for the release of AC Power from the 50/50 joint venture after the two sides failed to reach agreement on restructuring GPL. All the agreements entered into in 1999 are to be terminated by the end of this month.
The failure to reach agreement arose as a result of the government’s unwillingness to indemnify the company from regulatory oversight and legal challenges via the courts.
“It is the government’s considered view, given that though the most generously disposed public utility investor would require a reasonable assurance that its investment is not subject to the risk of punitive regulatory rulings and frivolous court actions, no investor could expect the government to accede to any agreement which would provide immunity from regulatory oversight and due process,” Hinds told reporters at the GTV 11 studios yesterday.
He said the government had been prepared to offer the investor terms which would have ensured regulations did not have an unintended negative impact on the fiscal integrity of GPL, and to also offer GPL reasonable comfort from having to comply with decisions or orders effectively threatening its commercial viability, once the laws were observed.
However, Hinds said the failure to resolve the question of indemnification to the satisfaction of AC Power led to a breakdown in the negotiations last Thursday and the parties proceeded to make arrangements to transfer ownership interest in and management of GPL to the government.
“...While the negotiating team were still continuing to work for agreement, AC Power informed the government that, despite AC Power’s written and oral presentations made since the parties began discussions, inexplicably, AC Power came to the conclusion that there were no settlement terms that would be acceptable to them,” Hinds said.
The government and AC Power have agreed to terminate the management agreement, the direct deed and guarantee agreements on April 30 but all other agreements terminate before with transfers to be effective by Tuesday or at the latest by April 30. Full and final releases from the agreements are to be effective by this time as well.
As part of the agreement, AC Power will terminate minority principal, ESBI, as subcontractor providing management services, by the termination date but the government retains the right to make separate arrangements with ESBI for continued provision of management services beyond the termination date.
AC Power, in the agreement, gives up its right to put its shares to the government for redemption and any associate rights and not to hold any discussions with third parties to sell its interest in GPL to such parties, pending execution of definitive agreements.
To facilitate the transition agreement, the government and AC Power agreed to instruct the Arbitration Panel hearing the dispute over the US$3.45M equity injection to hold its decision until the transfer date (April 8th). They further agreed that with the releases to the agreement being executed and the US$3.45M, held in escrow, being released to AC Power, the parties would direct the panel not to render its decision.
Government and AC Power also agreed to co-operate for a smooth transition of management and to refrain from making any “detrimental public statements about one another”. The agreements are subject to approval by both Cabinet and AC Power’s board.
Alli, government’s director on the GPL board, told the media a new board to oversee GPL’s operation should be in place by Friday or soon after (the current board expires on Thursday). A new management team to allow for the management transfer is to be in place in two weeks, by April 14.
The government expects to identify officers to fill four critical management positions (Chief Executive Officer, Chief Financial Officer, Chief Operations Officer and Chief Commercial Officer) in ten days (by April 10th). The new management arrangement is expected to yield an annualised benefit of US$2.1M to the cash position of the company as the outgoing management team’s contract carried a price of US$3.6M per annum.
By the end of the month, Alli said the new management team would have to develop a short-term crisis business plan to improve the levels of electricity delivered to consumers; improve the cash flow position of the company with emphasis on collections of arrears and make offers of prepaid services with discounts and incentives; undertake an evaluation of the company’s equipment, generation in particular, to determine the overdue maintenance programme for the board/government’s intervention.
The new management would be given until the end of May to develop a medium-term business plan to take the company over a one to two year period to ensure the sustainability of the company flowing from the crisis business plan; address the technical and commercial losses within the levels of financing available, and develop a public programme to sensitise employees and consumers on the negative effect of commercial losses to the industry.
The board and management would be tasked with securing funding for the company.
In the long-term, Alli said the government intended to invite third parties to invest in the utility. He said the process had already commenced to identify investors to take the utility into the future.
“This presents a window of opportunity for a consortium of local investors - hopefully led by the financial institutions - to assure the future of this important sector of the economy.”
The government and AC Power, led by CDC Globeleq, failed after eight months of negotiations to rescue the operations of GPL, which in recent weeks saw a return of blackouts as the company claimed inadequate cash flow.
However, in answer to queries by the Public Utilities Commission (PUC) on what sums it received as revenues and how this was expended for the months of January, February and up to mid-March, the company eventually submitted information showing that $860M, $880M and $824M were received for the respective periods. The PUC has queried the expenditure in January and February of $120M and $157M in management fees when only $180M is payable per quarter.
Hinds yesterday appealed to consumers to pay for the electricity services as GPL faced a formidable challenge to become a viable and efficient operation.
He said the government had begun meetings with the social partners to share in the challenge.
“There are realities we must face. The power company must pay its own way. It must operate efficiently and must be able to charge realistic tariff rates. The government cannot subsidise public utility services and even if it could, the consumer would still pay, however, indirectly, through taxes,” the Prime Minister said.
He estimates that commercial theft accounts for around 20% and said this loss is reflected in the bills of consumers who do pay. He said the government can improve on collections and enforce disconnections, but in the final analysis, the culture of consumers counts in eliminating this problem. Instituting a system of pre-paid cards for electricity use would also require capital investments to change the system of metering.
Hinds acknowledged that some would say the 1999 GPL deal was bad but noted that hindsight always gave 20/20 vision.]
He said while the investor asked for conditions of protection unacceptable and incompatible with good governance, much had been gained from the deal. He noted the equity injection of US$20M and new debt financing of US$10M which purchased some 15 megawatts of new generation capacity and began the rehabilitation of the transmission and distribution system. He also said thousands were supplied with electricity and the frequency and duration of power outages had been substantially reduced until recently.
Alli sees the opportunity of GPL being state-owned again as allowing for the rural electrification programme to advance, facilitating 40,000 new connections, once successful representation can be made to the Inter-American Development Bank (IDB) to release the requisite loan.
The other government director, Brassington, said that for GPL to meet its critical cash demands higher tariffs must be implemented.
He said, however, there would be a lag between the effective implementation of tariffs for GPL and the return to normalcy in GPL’s cash flows.
He said normalcy would not be achieved until the latter half of this year, assuming that higher rates were implemented within the next two months and customers paid their bills promptly; and that the government and other customers lend support and prepay some of their bills for the current year.
He also expressed the view that transforming GPL into an efficient utility would only be achieved if significant sums were invested in reducing commercial and technical losses but this would require tens of millions of dollars. The priority, he said, would be given to commercial losses.
